PBOC Deputy Governor Yi Gang Says Yuan Is Closest on Record to Equilibrium

The yuan’s exchange rate is the closest to “equilibrium” as it has ever been, Chinese central bank deputy governor Yi Gang said.

Bolstering domestic consumption, restructuring the economy and reducing surpluses will help the currency reach equilibrium, Yi, who is also head of the State Administration of Foreign Exchange, said at the opening of the annual session of the National People’s Congress in Beijing today. The “yuan exchange rate has never been closer to equilibrium,” Yi said.

“This is a fair value concept,” Liu Li-gang, an economist with Australia & New Zealand Banking Group, said in Hong Kong. “But I do not view the yuan as close to its equilibrium value. There is still a large appreciation needed in the medium term.”

China’s currency has advanced 3.5 percent against the dollar since a two-year peg was relaxed on June 19, as nations including the U.S. called for the Chinese government to allow a faster pace of appreciation. U.S. Treasury Secretary Timothy Geithner reiterated March 3 the yuan is “substantially undervalued,” putting other countries at a competitive disadvantage.

The yuan gained as much as 0.1 percent to 6.5665 per dollar yesterday, before closing at 6.5686 per dollar in Shanghai, according to the China Foreign Exchange Trade System. It touched 6.5654 on Feb. 21, the strongest level since China unified official and market exchange rates at the end of 1993.

Cross Border Transactions

Yi said equilibrium will be reached “soon.”

China plans to expand cross-border use of the yuan for the 2011-to-2015 period, according to the draft of the 12th Five- Year Plan released today at the NPC. The government also plans to improve its foreign exchange management, and broaden the channels of use for its foreign exchange reserves.

“This will pave the way for a more flexible exchange rate,” said ANZ’s Liu. “It’s in China’s interest to let the yuan appreciate in order to help dampen the effect of imported inflation.”

Premier Wen Jiabao said in his annual state-of-the-nation report that the government will target 8 percent economic growth this year and “decisively” curb increases in prices that could affect social stability. He reaffirmed that the nation is maintaining a “proactive” fiscal policy and a “prudent” monetary policy.

Wen is encouraging greater use of China’s currency for international trade and investment to reduce reliance on dollars as the Federal Reserve prints money to support the U.S. economy. Cross-border yuan trade settlement was 506.3 billion yuan ($77 billion) last year, the People’s Bank of China said Mar. 2.

--Eva Woo, Sonja Cheung. Editors: Tan Hwee Ann, Chua Kong Ho.

To contact Bloomberg News staff for this story: Sonja Cheung in Beijing at +86-10-6649-7574 or scheung58@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.